Honor Among Thieves: Open Internal Reporting and Managerial Collusion

Abstract

Firms have increasingly adopted open work environments. Although openness is thought to have benefits, it could also expose firms to an unanticipated cost. An open (closed) internal reporting environment makes it more (less) likely that managers will observe a colleague's communications with senior executives. This increase in what one manager knows about another manager's communication to senior executives could facilitate employee collusion to extract resources from the firm. To test whether internal reporting openness results in more collusion, we conduct an experiment in which two managers each make separate reports to the firm about cost information they know in common but that remains unknown by the firm. Because both managers face the same truth‐inducing contract, conventional economic theory predicts that they will not collude to misreport costs regardless of reporting openness. However, using behavioral theory involving trust and reciprocity, we predict and find that managers honor their nonbinding collusive agreements and successfully collude more often in an open versus closed internal reporting environment, leading to lower firm welfare in the open environment. These results suggest that firms should consider how the cost of collusion compares to the benefits of openness.

Systems of secrecy: Confidences and gossip in management accountants’ handling of dual role expectations and MCS limitations

“…Extant research shows that the more interactions between management accountants and their interlocutors, the higher the use and quality of information communicated (Byrne and Pierce, 2007). Exchange of accounting information, especially through talking, increases information fluidity (Burns and Scapens, 2000;McKinnon and Bruns, 1992), fosters cooperation and also increases trust (Evans et al, 2016;Rowe, 2004;Vosselman and van der Meer-Kooistra, 2009). Management accountants play an important role in this process given that trust in accounting figures is inseparable from the trust that the accountants have succeeded in winning from their interlocutors (Johansson and Baldvinsdottir, 2003).…”

Peer pressure and social comparisons with heterogeneous ability

“…According to the International Facility Management Association, as of 2014, 70% of U.S. offices have no or low partitions. Both the positive and negative aspects of increased openness have been discussed (Evans, Moser, Newman, & Stikeleather, ). Increased openness may favor fairness and transparency by facilitating communication, information sharing, and cooperation.…”

“…According to the New Yorker, such an environment may ultimately impair workers' attention spans, productivity, creative thinking, and satisfaction. Evans et al () also show that openness could expose firms to costs due to collusion among workers. Consequently, the observation of coworkers may lead to social comparisons that, in turn, may affect the behavior of not only workers but also ultimately of employers, even when there are no technical externalities across production (i.e., no teamwork occurs).…”

Vertical Pay Dispersion, Peer Observability, and Misreporting in a Participative Budgeting Setting

“…To foster communication and collaboration, many firms are adopting “open office” designs that remove walls and barriers between office workers, increasing the likelihood of peer observability (Kaufman ; Waber et al ) . Prior research suggests that peer observability makes honesty and fairness concerns more salient, which in turn can affect employees' effort, performance, and willingness to collude (e.g., Knez and Simester ; Towry ; Hannan et al ; Evans et al ). In this study, we examine whether peer observability activates these different social norms under varying levels of vertical pay dispersion and whether social norm activation, in turn, influences the amount of budgetary slack subordinates create.…”